BofA Is in Talks to Settle State Claims Over Merrill

Louise Story|The New York Times

Published 6:45 AM ET Tue, 12 Jan 2010
Updated 10:14 PM ET Wed, 17 March 2010
The New York Times

A year after its controversial takeover of Merrill Lynch, Bank of America is discussing settling a troublesome state inquiry into the star-crossed deal and the billions of dollars in bonuses that Merrill hurriedly paid its employees.

Oliver Quillia for cnbc.com

Bank of America branch, New York City.

As the banking industry braces for a furor over a new round of big bonuses, Bank of America is negotiating with the staff of the New York attorney general, Andrew M. Cuomo, to settle claims that the bank failed to adequately disclose the risks of the takeover to its shareholders, according to people with knowledge of the matter. Mr. Cuomo has also focused on the bonuses that Merrill paid despite its perilous financial condition.

While no settlement has been reached and the talks are continuing, Bank of America’s new chief executive, Brian T. Moynihan, is interested in bringing an end to myriad legal troubles plaguing the bank. The two sides met last Friday to discuss a possible deal.

With talks with Mr. Cuomo’s office gathering force, Bank of America claimed a crucial legal victory in a separate federal case on Monday. A federal judge, Jed S. Rakoff, rejected a request by the Securities and Exchange Commission to broaden its claims against the bank, which center on the Merrill bonuses. The SEC also said it did not plan to bring claims against individual executives at the bank.

The Bank of America-Merrill merger — a pivotal moment in the financial crisis — has caused headaches both for Bank of America and the SEC Judge Rakoff previously rejected an initial $33 million settlement between the commission and the bank, calling the agreement too low and raising questions about the SEC’s investigation. After Monday’s ruling, the SEC is left to pursue a narrow case, while Bank of America executives are trying to resolve various inquiries without dropping their position that its executives did nothing wrong, legal experts said.

“This is one more twist in a very complicated maze of parties with lots of agendas,” said David Skeel, a law professor at the University of Pennsylvania who is watching the bank’s cases. “There’s not an obvious way out for anybody here, the SEC or the bank.”

Judge Rakoff’s latest ruling came on the same day that Mr. Cuomo’s office, which has sought a prominent role in cases stemming from the financial collapse, demanded information on executive pay for 2009 from Bank of America and seven other big banks that received taxpayer bailout funds. In letters to the banks, Mr. Cuomo asked the companies to disclose various details about their bonus payouts. How or whether the banks would comply with that request was unclear.

Bank of America appears to have become more amenable to working with state and federal officials since Kenneth D. Lewis announced his retirement as chief executive, which was effective on Jan. 1. Mr. Moynihan, bank insiders say, hopes to make a clean break with the legal problems left over from the Lewis years. The takeover of Merrill prompted scores of shareholder lawsuits, as well as state and federal investigations, and eventually helped drive Mr. Lewis from his post.

Judge Rakoff’s ruling on Monday barred the SEC from expanding its case but allowed it to file a new one, and the commission said in a statement that it would file a second complaint. That second complaint will focus on Merrill’s gaping $15 billion in losses in the fourth quarter, which were not disclosed before the deal closed. The SEC cases have some similarities to Mr. Cuomo’s, which from the start focused on Merrill’s losses. Such overlap may enable the SEC to join Mr. Cuomo’s office in a global settlement and thus avoid a trial that could be embarrassing should the SEC lose.

Unlike the SEC, Mr. Cuomo would like to have individual bank executives held responsible in the case, which could include individual fines. Those fines could come out of the executives’ pensions.

Bank analysts said the bank and its new chief executive were most likely evaluating whether the cost of a settlement was worth it for a clean footing.

“It’s a balance between the attention-grabbing headlines and settling too early,” said John McDonald, an analyst with Sanford C. Bernstein.